How Investible Startups Attract Investors

What makes an investible start-up? Do you dream of creating a successful start-up? Are you thinking about investing in a start-up? Both are increasingly popular endeavors. Lots of businesses provide a good income for the founder, but what defines a start-up business that attracts investors?

Jonathan Friedman of LionBird, a digital health investor, wrote in VentureBeat about these six factors which dissuade him from making an investment:

• Weak barriers to entry
• Lack of meaningful differentiation
• Unsustainable unit economics
• Niche markets without explosive growth
• Bad cap table (or outline of a company’s shareholder equity)
• Founder bait and switch

If you want to attract investors like a magnet follow these expert tips on raising capital.

1. Strengthen Your Management Team

A healthy management team is typically individuals with experience bringing a product to market or some previous form of successful start-up experience. Venture capitalists take a big risk when investing in a start-up, but a successful track record can ease their minds and open their pockets.

Your company should have a serious board of directors, says Craig Everett, Ph.D., assistant professor at Pepperdine University’s Graziadio School of Business and Management. He explains that investors like to see a board of outsiders who have invested capital into the business. Investors are more comfortable if they are not the first to write a check – the founders have attracted expert outsiders.

2. Successful Start-ups Solve a Problem

Is there a need for your product or service? Does it solve a problem? Can you provide evidence of its effectiveness with user testing? If your product doesn’t have a market it won’t attract investors.

Investors are open to risk-taking if a product proposes major changes to an industry. A University of California, Riverside, and Rotterdam School of Management study found that investors like to invest in disruptive products. The odds of start-ups receiving first-round funding increased by 22% as disruptive messaging increased. Still, disruptive products or technologies may promise huge returns, but investors may hold off until later stage funding rather than jump in on an unproven product.

Every product doesn’t have to be disruptive, but it should fix, improve, advance, or transform some aspect of a customer’s life.

3. Share the Same Vision

Before you pitch to specific venture capitalists, you should make sure your company and its product fit their investment portfolio. Are they comfortable in your niche? If they want a managing stake in the company, is that acceptable to you, and are they near enough to take a hands-on role? If you’re looking for a social impact investor it’s important that the portfolio demonstrates an interest that aligns with your goals.

4. Scalability

Scalability implies growth potential and your ability to handle that growth – major factors for successful start-ups. Investors with experience and knowledge put high stock in an entrepreneur’s growth readiness.

Martin Zwilling of start-up Professionals has tips for making your start-up scalable.

• Have a strong business plan with the goal of higher margins and minimum staff. Labor-intensive start-ups can be difficult to grow and maintain.
• Outsource tasks that are not part of your company’s core competency. Growing expertise in every aspect of the process is expensive and slow.
• Use a minimum viable product (MVP) to prove that your product works and that customers are willing to pay the full price.

Investors want to make money. Entrepreneurs want to attract investors and become successful. That requires positioning your business for growth and proving to investors that customers are interested in what you have to offer.

We think you’ll also like:

1. What is and Angel Investor and What Motivates Angels to Invest
2. Why International Startups are Attracting US Venture Capitalists
3. An Introduction to the World of Angel Investing

[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure and each includes a comprehensive customer PowerPoint about the topic):

1. The Very Basics – Forming the Business
2. Turning an Idea or Product into a Business
3. Raising Capital: Negotiating with Potential Investors

This is an updated version of an article originally published on October 31, 2019. It has been updated by Maryan Pelland]

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